Trading Sessions

Now that you know what forex is, why you should trade it, and who makes up the forex market, it's about time you learned when you can trade.
Yes, it is true that the forex market is open 24 hours a day, but that doesn't mean it's always active the whole day.
You can make money trading when the market moves up, and you can even make money when the market moves down.
BUT you will have a very difficult time trying to make money when the market doesn't move at all.
And believe us, there will be times when the market is as still as the victims of Medusa. This lesson will help determine when the best times of the day are to trade.

Market Hours

Before looking at the best times to trade, we must look at what a 24-hour day in the forex world looks like.
The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and Pipcrawler's favorite time to trade, the New York session. Below are tables of the open and close times for each session:
Summer

Time Zone	EDT	GMT
Sydney Open Sydney Close	6:00 PM 3:00 AM	10:00 PM 7:00 AM
Tokyo Open Tokyo Close	7:00 PM 4:00 AM	11:00 PM 8:00 AM
London Open London Close	3:00 AM 12:00 PM	7:00 AM 4:00 PM
New York Open New York Close	8:00 AM 5:00 PM	12:00 PM 9:00 PM

Winter

Time Zone	EST	GMT
Sydney Open Sydney Close	4:00 PM 1:00 AM	9:00 PM 6:00 AM
Tokyo Open Tokyo Close	6:00 PM 3:00 AM	11:00 PM 8:00 AM
London Open London Close	3:00 AM 12:00 PM	8:00 AM 5:00 PM
New York Open New York Close	8:00 AM 5:00 PM	1:00 PM 10:00 PM

You can see that in between each session, there is a period of time where two sessions are open at the same time. From 3:00-4:00 am EDT, the Tokyo session and London session overlap, and from 8:00-12:00 am EDT, the London session and the New York session overlap.
Naturally, these are the busiest times during the trading day because there is more volume when two markets are open at the same time. This makes sense because during those times, all the market participants are wheelin' and dealin', which means that more money is transferring hands.
Now, you're probably looking at the Sydney open and thinking why it shifts two hours. You'd think that Sydney's open would only move one hour when the U.S. adjusts for standard time, but remember that when the U.S. shifts one hour back, Sydney actually moves forward by one hour (seasons are opposite in Australia). You should always remember this if you ever plan to trade during that time period.
Let's take a look at the average pip movement of the major currency pairs during each trading session.

Pair	Tokyo	London	New York
EUR/USD	76	114	92
GBP/USD	92	127	99
USD/JPY	51	66	59
AUD/USD	77	83	81
NZD/USD	62	72	70
USD/CAD	57	96	96
USD/CHF	67	102	83
EUR/JPY	102	129	107
GBP/JPY	118	151	132
AUD/JPY	98	107	103
EUR/GBP	78	61	47
EUR/CHF	79	109	84

From the table, you will see that the European session normally provides the most movement.
Let's take a more in depth look at each of the session, as well as those periods when the sessions overlap.

>>Click here to get to the next article<<

Read more: http://www.babypips.com/school/trading-sessions.html#ixzz1QgIrFez2

History of Forex

At the end of the World War II, the whole world was experiencing so much chaos that the major Western governments felt the need to create a system to stabilize the global economy.
Known as the "Bretton Woods System," the agreement set the exchange rate of all currencies against gold. This stabilized exchange rates for a while, but as the major economies of the world started to change and grow at different speeds, the rules of the system soon became obsolete and limiting.
Soon enough, come 1971, the Bretton Woods Agreement was abolished and replaced by a different currency valuation system. With the United States in the pilot's seat, the currency market evolved to a free-floating one, where exchange rates were determined by supply and demand.
At first, It was difficult to determine fair exchange rates, but advances in technology and communication eventually made things easier.
Once the 1990s came along, thanks to computer nerds and the booming growth of the internet (cheers to you Mr. Al Gore), banks began creating their own trading platforms. These platforms were designed to stream live quotes to their clients so that they could instantly execute trades themselves.
Meanwhile, some smart business-minded marketing machines introduced internet-based trading platforms for individual traders.
Known as "retail forex brokers", these entities made it easy for individuals to trade by allowing smaller trade sizes. Unlike in the interbank market where the standard trade size is one million units, retail brokers allowed individuals to trade as little as 1000 units!

Retail Forex Brokers

In the past, only the big speculators and highly capitalized investment funds could trade currencies, but thanks to retail forex brokers and the Internet, this isn't the case anymore.
With hardly any barriers to entry, anybody could just contact a broker, open up an account, deposit some money, and trade forex from the comfort of their own home. Brokers basically come in two forms:

1. Market makers, as their name suggests, "make" or set their own bid and ask prices themselves and
2. Electronic Communications Networks (ECN), who use the best bid and ask prices available to them from different institutions on the interbank market.

Market Makers

Let's say you wanted to go to France to eat some snails. In order for you to transact in the country, you need to get your hands on some euros first by going to a bank or the local foreign currency exchange office. For them to take the opposite side of your transaction, you have to agree to exchange your home currency for euros at the price they set.
Like in all business transactions, there is a catch. In this case, it comes in the form of the bid/ask spread.
For instance, if the bank's buying price (bid) for EUR/USD is 1.2000, and their selling price (ask) is 1.2002, then the bid/ask spread is 0.0002. Although seemingly small, when you're talking about millions of these forex transactions every day, it does add up to create a hefty profit for the market makers!
You could say that market makers are the fundamental building blocks of the foreign exchange market. Retail market makers basically provide liquidity by "repackaging" large contract sizes from wholesalers into bite size pieces. Without them, it will be very hard for the average Joe to trade forex.

Electronic Communications Network

Electronic Communication Network is the name given for trading platforms that automatically match customer's buy and sell orders at stated prices. These stated prices are gathered from different market makers, banks, and even other traders who use the ECN. Whenever a certain sell or buy order is made, it is matched up to the best bid/ask price out there.
Due to ability of traders to set their own prices, ECN brokers typically charge a VERY small commission for the trades you take. The combination of tight spreads and small commission usually make transaction costs cheaper on ECN brokers.
Of course, it's not enough to know the big guys in the biz. As Big Pippin once said, "Trading requires timing". Do you know WHEN you should trade?

>>Click here to get to the next article<<

Forex Market Structure

For the sake of comparison, let us first examine a market that you are probably very familiar with: the stock market. This is how the structure of the stock market looks like:

"I have no choice but to go through a centralized exchange!"

By its very nature, the stock market tends to be very monopolistic. There is only one entity, one specialist that controls prices. All trades must go through this specialist. Because of this, prices can easily be altered to benefit the specialist, and not traders.

How does this happen?

In the stock market, the specialist is forced to fulfill the order of its clients. Now, let's say the number of sellers suddenly exceed the number of buyers. The specialist, which is forced to fulfill the order of its clients, the sellers in this case, is left with a bunch of stock that he cannot sell-off to the buyer side.

In order to prevent this from happening, the specialist will simply widen the spread or increase the transaction cost to prevent sellers from entering the market. In other words, the specialists can manipulate the quotes it is offering to accommodate its needs.

Trading Spot FX is Decentralized

Unlike in trading stocks or futures, you don't need to go through a centralized exchange like the New York Stock Exchange with just one price. In the forex market, there is no single price that for a given currency at any time, which means quotes from different currency dealers vary.

"So many choices! Awesome!"

This might be overwhelming at first, but this is what makes the forex market so freakin' awesome! The market is so huge and the competition between dealers is so fierce that you get the best deal almost every single time. And tell me, who does not want that?

Also, one cool thing about forex trading is that you can do it anywhere. It's just like trading baseball cards. You want that mint condition Mickey Mantle rookie card, so it is up to you to find the best deal out there. Your colleague might give up his Mickey Mantle card for just a Babe Ruth card, but your best friend will only part with his Mickey Mantle rookie card for your soul.

The FX Ladder

Even though the forex market is decentralized, it isn't pure and utter chaos! The participants in the FX market can be organized into a ladder. To better understand what we mean, here is a neat illustration:

At the very top of the forex market ladder is the interbank market. Composed of the largest banks of the world and some smaller banks, the participants of this market trade directly with each other or electronically through the Electronic Brokering Services (EBS) or the Reuters Dealing 3000-Spot Matching.

The competition between the two companies - the EBS and the Reuters Dealing 3000-Spot Matching - is similar to Coke and Pepsi. They are in constant battle for clients and continually try to one-up each other for market share. While both companies offer most currency pairs, some currency pairs are more liquid on one than the other.

For the EBS plaform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF are more liquid. Meanwhile, for the Reuters platform, GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid.

All the banks that are part of the interbank market can see the rates that each other is offering, but this doesn't necessarily mean that anyone can make deals at those prices.

Like in real life, the rates will largely dependent on the established CREDIT relationship between the trading parties. Just to name a few, there's the "B.F.F. rate," the "customer rate," and the "ex-wife-you-took-everything rate." It's like asking for a loan at your local bank. The better your credit standing and reputation with them, the better the interest rates and the larger loan you can avail.

Next on the ladder are the hedge funds, corporations, retail market makers, and retail ECNs. Since these institutions do not have tight credit relationships with the participants of the interbank market, they have to do their transactions via commercial banks. This means that their rates are slightly higher and more expensive than those who are part of the interbank market.

At the very bottom of the ladder are the retail traders. It used to be very hard for us little people to engage in the forex market but, thanks to the advent of the internet, electronic trading, and retail brokers, the difficult barriers to entry in forex trading have all been taken down. This gave us the chance to play with those high up the ladder and poke them with a very long and cheap stick.

>>Click here to get to the next article<<

Advantages of Forex

There are many benefits and advantages of trading forex. Here are just a few reasons why so many people are choosing this market:

No commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the "bid-ask spread".

No middlemen

Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.

No fixed lot size

In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we'll explain later why a $25 account is a bad idea).

Low transaction costs

The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage and all will be explained later.

A 24-hour market

There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.

No one can corner the market

The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.

Leverage

In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.

For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on. While this is all gravy, let's remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

High Liquidity.

Because the forex market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).

Low Barriers to Entry

You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options or futures, it doesn't. Online forex brokers offer "mini" and "micro" trading accounts, some with a minimum account deposit of $25.

We're not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn't have a lot of start-up trading capital.

Free Stuff Everywhere!

Most online forex brokers offer "demo" accounts to practice trading and build your skills, along with real-time forex news and charting services.

And guess what?! They're all free!

Demo accounts are very valuable resources for those who are "financially hampered" and would like to hone their trading skills with "play money" before opening a live trading account and risking real money.

>>Click here to get to the next article<<

Market Size and Liquidity

Unlike other financial markets like the New York Stock Exchange, the forex spot market has neither a physical location nor a central exchange.

The forex market is considered an Over-the-Counter (OTC), or "Interbank", market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

This means that the spot forex market is spread all over the globe with no central location. They can take place anywhere, even at the top of Mt. Fiji!

The forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations.

In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices, and reputation of the trading counterpart.

The chart below shows the ten most actively traded currencies.

The dollar is the most traded currency, taking up 84.9% of all transactions. The euro's share is second at 39.1%, while that of the yen is third at 19.0%. As you can see, most of the major currencies are hogging the top spots on this list!

*Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%

The chart above shows just how often the U.S. dollar is traded in the forex market. It is on one side of a ridiculous 84.9% of all reported transactions!

The Dollar is King

You've probably noticed how often we keep mentioning the U.S. dollar (USD). If the USD is one half of every major currency pair, and the majors comprise 75% of all trades, then it's a must to pay attention to the U.S. dollar. The USD is king!

In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises almost 62% of the world's official foreign exchange reserves! Because almost every investor, business, and central bank own it, they pay attention to the U.S. dollar.

There are also other significant reasons why the U.S. dollar plays a central role in the forex market:

• The United States economy is the LARGEST economy in the world.
• The U.S. dollar is the reserve currency of the world.
• The United States has the largest and most liquid financial markets in the world.
• The United States has a super stable political system.
• The United States is the world's sole military superpower.
• The U.S. dollar is the medium of exchange for many cross-border transactions. For example, oil is priced in U.S. dollars. So if Mexico wants to buy oil from Saudi Arabia, it can only be bought with U.S. dollar. If Mexico doesn't have any dollars, it has to sell its pesos first and buy U.S. dollars.

Speculation

One important thing to note about the forex market is that while commercial and financial transactions are part of trading volume, most currency trading is based on speculation.

In other words, most trading volume comes from traders that buy and sell based on intraday price movements.

The trading volume brought about by speculators is estimated to be more than 90%!

The scale of the forex speculative market means that liquidity - the amount of buying and selling volume happening at any given time - is extremely high.

This makes it very easy for anyone to buy and sell currencies.

From the perspective of an investor, liquidity is very important because it determines how easily price can change over a given time period. A liquid market environment like forex enables huge trading volumes to happen with very little effect on price, or price action.

While the forex market is relatively very liquid, the market depth could change depending on the currency pair and time of day.

In the "When" lesson, we examine how liquidity and market interest changes throughout the trading day with an eye to what it means for trading in particular currency pairs.

>>Click here to get to the next article<<

Currencies are traded in Pairs

Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).

When you trade in the forex market, you buy or sell in currency pairs.

Imagine each pair constantly in a "tug of war" with each currency on its own side of the rope. Exchange rates fluctuate based on which currency is stronger at the moment.

Major Currency Pairs

The currency pairs listed below are considered the "majors". These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.

Pair	Countries	FX Geek Speak
EUR/USD	Euro zone / United States	"euro dollar"
USD/JPY	United States / Japan	"dollar yen"
GBP/USD	United Kindom / United States	"pound dollar"
USD/CHF	United States/ Switzerland	"dollar swissy"
USD/CAD	United States / Canada	"dollar loonie"
AUD/USD	Australia / United States	"aussie dollar"
NZD/USD	New Zealand / United States	"kiwi dollar"

Major Cross-Currency Pairs or Minor Currency Pairs

Currency pairs that don't contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the "crosses." Major crosses are also known as "minors." The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.

Euro Crosses

Pair	Countries	FX Geek Speak
EUR/CHF	Euro zone / Switzerland	"euro swissy"
EUR/GBP	Euro zone / United Kingdom	"euro pound"
EUR/CAD	Euro zone / Canada	"euro loonie"
EUR/AUD	Euro zone / Australia	"euro aussie"
EUR/NZD	Euro zone / New Zealand	"euro kiwi"

Yen Crosses

Pair	Countries	FX Geek Speak
EUR/JPY	Euro zone / Japan	"euro yen" or "yuppy"
GBP/JPY	United Kingdom / Japan	"pound yen" or "guppy"
CHF/JPY	Switzerland / Japan	"swissy yen"
CAD/JPY	Canada / Japan	"loonie yen"
AUD/JPY	Australia / Japan	"aussie yen"
NZD/JPY	New Zealand / Japan	"kiwi yen"

Pound Crosses

Pair	Countries	FX Geek Speak
GBP/CHF	United Kingdom / Switzerland	"pound swissy"
GBP/AUD	United Kingdom / Australia	"pound aussie"
GBP/CAD	United Kingdom / Canada	"pound loonie"
GBP/NZD	United Kingdom / New Zealand	"pound kiwi"

Other Crosses

Pair	Countries	FX Geek Speak
AUD/CHF	Australia / Switzerland	"aussie swissy"
AUD/CAD	Australia / Canada	"aussie loonie"
AUD/NZD	Australia / New Zealand	"aussie kiwi"
CAD/CHF	Canada / Switzerland	"loonie swissy"
NZD/CHF	New Zealand / Switzerland	"kiwi swissy"
NZD/CAD	New Zealand / Canada	"kiwi loonie"

Exotic Pairs

No, exotic pairs are not exotic belly dancers who happen to be twins. Exotic pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, or Hungary. The chart below contains a few examples of exotic currency pairs. Wanna take a shot at guessing what those other currency symbols stand for?

Depending on your forex broker, you may see the following exotic pairs so it's good to know what they are. Keep in mind that these pairs aren't as heavily traded as the "majors" or "crosses," so the transaction costs associated with trading these pairs are usually bigger.

Pair	Countries	FX Geek Speak
USD/HKD	United States / Hong Kong
USD/SGD	United States / Singapore
USD/ZAR	United States / South Africa	"dollar rand"
USD/THB	United States / Thailand	"dollar baht"
USD/MXN	United States / Mexico	"dollar peso"
USD/DKK	United States / Denmark	"dollar krone"
USD/SEK	United States / Sweden
USD/NOK	United States / Norway

It isn't unusual to see spreads that are two or three times bigger than that of EUR/USD or USD/JPY. So if you want to trade exotics pairs, remember to factor this in your decision.

>>Click here to get to the next article<<